How can the government use fiscal policy to achieve its objectives?

Extracts from this document...

Introduction

Principles of Macroeconomics An Unpredictable Economic Future During the last decades the economies of all the countries of the world have been undergoing expansions and recessions. The problem is that the future of the economy cannot be predicted therefore governments will have to adopt their tools and prepare to face incoming recessions. Some of the main tools are fiscal policies. What are fiscal policies? How does the government use the fiscal policies to achieve their objectives? Every government has a budget which they use for many purposes such as to finance, stabilize the economy and encourage its development. The budget himself is calculated through the receipts (the income the government gathers through taxes mainly) ...read more.

Middle

The same applies for the discretionary fiscal policy, but this one has to be initiated by the government. Often the fiscal policies will have a supply side effect as taxes will discourage the people to work which will lower the potential GDP and also people will start to save more and their consumption will decrease, following a decrease in the real GDP. But how have some governments of the world used fiscal policies to achieve their objectives over the years? The Albanian government adopted the policy of privatization. They say that one day Sali Berisha (Prime Minister of Albania) woke up and decided to privatize the banking and electrical system. This was planned bt the government therefore it was a discretionary policy. ...read more.

Conclusion

Despite this in the last year the Albanian economy has experienced high economic growth and this is expected to keep on going for a long time along with low inflation and stable exchange rates. The point for this policy has always been to have a steady economic growth, keep a low budget deficit and take international small loans only and they seem to have everything under control so far. Fiscal policies are one of the most important tools to regulate the economy and stabilize it. They can be either automatic or discretionary. Albania undertook the path of privatization and so far it all sorted out well for them. The only visual disadvantage the fiscal policies have is their supply-side effect which lowers both potential and real GDP. In my opinion the economy can never be self-regulated and work at a full-employment level, therefore the fiscal policies are vital. ...read more.

Related AS and A Level Markets & Managing the Economy essays

(The total demand for all goods and services from all sources in the economy) These policies will encourage firms to expand output and consequently take on more labour. However, care must be taken not to overdo expansionary policies, lest growth leads to pressure on resources and accelerating inflation, which would only worsen the problem and severity of unemployment.

Demand-pull inflation is likely when there is full employment of resources and aggregate supply is inelastic, an increase in aggregate demand will lead to a general increase in prices, this might rise due to a depreciation of the exchange rate, which increases the price of imports.

The final option open to the government is they could increase the size of the workforce, this is largely linked to improved education and training. Basically they need to encourage more people to enter work and increase the opportunities open to those currently seeking jobs.

Theory and empirical evidence clearly confirm that there is no long-term trade-off between price stability and economic growth in the long run, simply lead to rising inflation. The trade-off will be shifted over a period again and again. For the short run, it is no doubt that trade-off will affect

Other than that, immigrant may also bring diseases from their native country which will affect the health rate of the local citizen. Pathogens and viruses are having high possibilities to spread to other countries through immigrants. For example, AIDS was transferred to the United States in 1969 through one infected immigrant from Haiti.

When government takes control of money supply, its control over nominal interest rate is zero. Money supply is control by buying and selling government bond between RBA and commercial banks. In conclusion, to eliminate the recessionary gap in the short run, government would use monetary policy instead of fiscal policy.

Private sector investment also increased from 11.2 percent to 11.7 percent of GDP. Public sector investment improved significantly by moving from 3.6 percent of GDP of last year to 4.6 percent of GDP this year. Fixed investment in rupee term grew by 25 percent this year as against 4.9 percent last year.

The lag time effect is because the MPC can not react instantly to changes in the market. Predicting what could happen in the market is very complicated and the best economic analyst will often get the general trends right but anything more specific will not normally be very reliable and